Stocks were quiet going into the end of the year, even with the major tax reform bill getting signed into law. This was already “baked into the cake” over the past few months and that is why stock prices didn’t see a huge jump. However, they did finish the month up about 1% (S&P 500).
For the year, the S&P 500 returned about 20%, which I think took most everybody by surprise, considering all of the political tension, both home and abroad in 2017. The best performing sector in 2017 was technology, returning about 37%. The worst was energy at about -4%.
2017 Q4 numbers are going to be pretty good for US companies when they report over the next few months. But the market moving news will be when they talk about how the new tax laws will affect their bottom line going forward.
Bonds were pretty much flat for December. I think bond investors are feeling that the 40 year bull market in bonds is coming to an end as interest rates start to turn up as our economy improves.
There are a lot of forces in play here affecting interest rates: inflation is still pretty tame and the dollar continues to weaken against foreign currencies. This is keeping rates extremely low here in the states. I kind of like this scenario right now as it keeps the Fed from messing with interest rates.
Outside the states, we still have the odd negative interest rates in Germany, France, Japan, and even Italy and it doesn’t look like they will be raising rates anytime soon. This gives us a little wiggle room when it comes to raising our rates, which is nice.
Speaking of interest rates, the Fed doesn’t meet again until the end of January. They are expected to stand pat on rates.
For those who weren’t around in the late 70’s/early 80’s and think rates are getting too high, here’s a nice 55 year chart of the interest rate of the US Treasury 10 year note to put it into perspective how low rates are right now: http://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart.
On the savings side, rates are starting to creep up with a little more speed but they’re certainly in no hurry.
Currently, the average money market/savings account is paying 0.20%.
The 1 year CD interest rate is now averaging 1.70% (up from 1.64% last month) and the 5 year CD rate is at 2.20%(up from 2.17% last month).
The good news is that mortgage rates continue to stay extremely low, with the 30 year rate at 4.15%. Depending on the loan terms, if you have a current mortgage with a loan rate over 5%, you should at least check out refinancing it.
Oil prices rose about 4.7% in December, continuing its upward trend since bottoming in June. Price per barrel now sits at $60.10.
The current cold snap will probably cause prices, specifically heating oil and natural gas, to increase in the ear term.
Nationally, gasoline prices are averaging about $2.50 per gallon. FYI, a year ago, we were paying $2.34. Tucson, AZ has the cheapest gas in the country at $2.13.
Check out the prices at the pump in your area: Gas Buddy.
Outlook
Events on the horizon that could move the markets in the near term:
- Russian Investigation: This took a break over the holidays but I’m sure it is going to be front and center once again. It’s hard to keep up with this one. There are so many moving pieces and distractions. This could make for a pretty good movie one day. Still, odds are slim that Mueller will indict President Trump, but it does appear that more of his aides and appointees will be in his crosshairs shortly. Any market pullback from this should be short lived (less than 6 months) and will provide a buying opportunity for long term investors.
- Escalating Tensions with North Korea: Kim Jong Nutbar continues to push Trump’s buttons by saying his nuke button is on his desk! So far, stocks see this as two kids in a name-calling contest but it could escalate quickly considering the tempers on both sides. Hoping they’ll both simmer down.
- Tax Law Effects: I’m very interested to see what companies will say in their earnings reports regarding how the new tax laws will affect their bottom lines. Although this good news has been mostly priced in, their could be some surprises that will give stocks another boost in the positive direction.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
